As the 2024 election approaches, tax policy is once again at the forefront of debate, with the potential to affect millions of Americans.
We are currently in an era of historically low tax brackets due to the implementation of the 2017 Tax Cuts and Jobs Act (TCJA), which is set to expire in 2026. This means that unless tax policy changes are made, individual and corporate taxes will likely revert to higher pre-2017 levels. Even in the event that Trump, who signed TCJA into law, gets elected, it’s unlikely that TCJA would be made “permanent” in its entirety.
Note: the word permanent is used loosely regarding tax law as a law is only “permanent” so long as it is not repealed and/or replaced by future legislation.
Legislative Challenges
It’s also worth noting that we are in a time of relatively unprecedented political polarization as the ideological gap between policymakers in Washington widens. This makes predicting future tax policy nearly impossible, because, in order for tax policy to become law, it typically goes through several steps:
- Proposal from the President
- Review by the House Ways and Means Committee
- Vote by the House of Representatives
- Review by the Senate Finance Committee
- Debate on the Senate floor
- Review by the joint Conference Committee
- Final version voted on by House and Senate separately
- Signed into law by the President
Even in the event that one party sweeps the White House, the Senate, and the House of Representatives, there are sure to be speed bumps along the way to tax policy implementation. In a divided government, the challenges are even more significant.
The purpose of this article is to summarize the tax policy proposals that have been shared by candidates Vice President Kamala Harris and former President Donald Trump and their respective campaigns, as these proposals give us a guide for what each candidate hopes to accomplish, even if future tax policy is likely to fall short of these initial goals.
A Note on Deficit Spending
The federal deficit continues to grow, driven by rising interest expense and entitlement spending, which can be defined as expenses that the federal government is required by law to fund and includes programs like Social Security and Medicare. As things currently stand, entitlement spending plus interest expense on federal debt are projected to surpass tax revenue as early as 2033.
Historically, Republican administrations have been known to address budget issues by decreasing government spending while Democratic administrations have been known to raise taxes. These days, it seems that both parties seem to have softened their respective stances as cutting spending on social programs and increasing taxes are both unpopular among voters.
This helps explain why the camps of Harris and Trump have proposed fiscal packages that are forecasted by JP Morgan to grow the deficit by over $1 trillion and over $3 trillion respectively in the next 10 years.
So what kind of tax policy are being proposed by the Trump and Harris camps? Because much of Trump’s platform is based on the currently in force Tax Cuts and Jobs Act of 2017 which was signed into law during Trump’s previous administration we’ll start with his camp.
Trump’s Tax Platform
Personal Income Taxes
- Make the current income tax rates, which were enacted as part of the 2017 TCJA and are set to sunset after 2025, permanent (indexed for inflation). These rates range from 10% to 37% as follows for the 2024 tax year:
- Exempt tips, Social Security, and overtime pay from taxation.
Corporate Taxes
- Cut the corporate income tax rate from 21% to 20%, and further cut to 15% for “American made” companies that produce within the U.S.
Tax Credits, Exemptions, and Deductions
- Uncap State and Local Tax (SALT) deduction for taxpayers with itemized deductions.
- Increase the Child Tax Credit (CTC) up to a maximum of $5,000 per child. (Current CTC amount is $3,600 per child for children under 5 and $3,000 per child for dependent children 5 years or older.)
Other Taxes
- Increase excise tax on large private university endowments (amount of increase is currently unclear) from current 1.4% rate.
- Assess tariffs of 10% to 20% on foreign goods and 60% on goods manufactured in China.
- Estate taxes – maintain current federal estate tax exemption threshold and corresponding lifetime gift tax exclusion set forth as part of the TCJA, indexed for inflation:
Harris’ Tax Platform
Personal Income Taxes
- Increase top marginal rate to 39.6% (from 37%) for individuals earning more than $400,000 and joint filers making more than $450,000 in household income.
- Note: Harris has pledged not to raise taxes for folks making less than $400,000 but has not directly addressed the impending sunset of the TCJA.
- Increase Net Investment Income Tax (NIIT) from 3.8% to 5% and include nonpassive income for single filers earning more than $400,000 and joint filers earning more than $450,000.
- Increase top capital gains tax rate from 20% to 28% for income above $1M.
- Exempt tips from taxation.
Corporate Taxes
- Increase corporate income tax rate from 21% to 28%.
- Increase excise tax on corporate stock buybacks from 1% to 4%.
- Sunset Qualified Business Income Deduction that benefits owners of passthrough entities such as S-Corporations, partnerships, and sole proprietorships.
Tax Credits, Exemptions, and Deductions
- Expand Earned Income Tax Credit to include filers without qualified dependents.
- Increase Child Tax Credit (CTC) as follows:
- Expand housing tax credits and implement a First Time Homebuyer credit up to $25,000.
- Make permanent the Premium Tax Credit (PTC) which was enacted as part of the American Rescue Plan Act (ARPA) of 2021 under Biden’s administration.
- Increase limit on deduction available for business start-up costs from $5,000 (current limit) to $50,000.
Other Taxes
- Assess a minimum effective income tax rate of 20% on those with wealth greater than $100M.
- Unrealized capital gains are to be included as income when considering this minimum tax.
- Increase Medicare tax rate from 1.45% to 5% for single filers earning over $400,000 and joint filers earning over $450,000.
- Tax unrealized capital gains at death above $5M exemption threshold ($10M for joint filers).
Summary
Tax policy is complex and requires congressional approval, making it unlikely that Kamala Harris’ or Donald Trump’s tax proposals will be implemented in full. Both candidates’ fiscal plans would result in significant deficit spending, with both plans expected to add trillions to the national debt in the next decade.
Additionally, current individual tax brackets are historically low, and with the 2017 Tax Cuts and Jobs Act set to expire in 2026, tax rates are more likely to rise than fall in the near future. These factors highlight the challenges and potential impacts of upcoming tax policy changes. For residents of Spokane seeking Financial Planning advice, consulting with a Financial Advisor can help navigate these potential changes.
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